Biden executive order on investments in China faces hurdles
Congress and Wall Street push back, while work with key allies remains to be done
NEW YORK -- The Biden administration's long-expected outbound screening mechanism for U.S. investment in China continues to be delayed as the White House tries to get key allies on board while navigating domestic pushback in Congress and on Wall Street.
The screening mechanism, which would be put forth via executive order from President Joe Biden, would focus on investments in dual-use technologies that could have military applications, such as semiconductors, quantum computing and artificial intelligence. Biotechnology may be included as well.
"Our desire is to avoid situations in which U.S. investments and business know-how support the advance of technologies that enhance the military or intelligence capabilities in countries of concern that could undermine our national security and put Americans at risk," said Paul Rosen, assistant secretary for investment security, on policy discussions regarding outbound investment while testifying to a U.S. Senate committee last week.
The expected measure is often described as a "reverse CFIUS" -- a reference to the Committee on Foreign Investment in the United States, which reviews foreign investment in the U.S. But it would be much narrower in scope.
"These are tailored measures," said Jake Sullivan, national security adviser, in an April speech. "They are not, as Beijing says, a technology blockade."
Sullivan mentioned the approach in a July 2021 address. This past March, reports from the Commerce and Treasury departments indicated that policy decisions would finally be coming soon.
The idea of screening outbound investment to China has been floated before. The Foreign Investment Review Modernization Act of 2018, under then-President Donald Trump, initially included provisions for CFIUS to have the power to review outbound investment activities. But lobbying from the business community led to their removal from the bill.
The Biden administration has opted to go with an executive order rather than the more drawn-out congressional process and the political obstacles it poses.
"They don't have a template to go off of, and they have concerns from the business community," said Sarah Bauerle Danzman, an associate professor of international studies at Indiana University and a former foreign investment security case analyst with the State Department. "So those two things combined have made it really hard for them to kind of adhere to the initial schedule that they wanted."
"What's taking so long is greed," said Derek Scissors, chief economist with China Beige Book and a senior fellow at the American Enterprise Institute in Washington.
"The financial community wants to have the option of investing a lot more in China whenever it wants," he said. "It doesn't mean it's about to invest a lot more in China. It just wants the option."
Rule-making via executive order rather than through Congress gives the White House more autonomy in putting together a new screening mechanism.
But crafting an executive order comprehensive enough to have teeth without being too burdensome so as to not gain any support is another challenge -- especially with how the White House hopes that allies in Europe and Japan will get on board and consider outbound screening regimes of their own.
In its communique issued this May, the Group of Seven affirmed the use of export controls as a "fundamental policy tool" and said that toward a meeting in October the G7 trade ministers would explore coordinated or joint actions where appropriate "against trade-related challenges, including economic coercion."
The European Commission's 2023 work program said the body would examine "whether additional tools are necessary" with regard to outbound strategic investment controls. Germany is also considering a legal basis for examining "security-critical" foreign investments by German and other European companies in China.
Without this kind of multilateral approach from international partners, others will just fill the gap left by the U.S.
"Capital is like water: if you squeeze it, it's going somewhere," said J. Philip Ludvigson, a former director for monitoring and enforcement at the Treasury Department who is now with the King and Spalding law firm.
Threading the needle and crafting a screening regime with key allies that addresses the concerns and goals for each, and their own differing relationships with China, is proving to be a challenge.
And in a globalized world where a Swedish company like Volvo Car Group is majority-owned by Chinese company Zhejiang Geely Holding Group, classifying what investment is technically going to China or not can prove difficult.
Washington politics have also played a part in the delay.
The recent showdown over the debt ceiling sidelined less essential items on the White House's agenda. And in late May, Rep. Patrick McHenry wrote to Treasury Secretary Janet Yellen for more information about the planned executive order.
The letter asked which Chinese technologies have been developed under past U.S. investments that this order would ban, and the value of recent venture capital funding investments supporting the Chinese technologies that would be subject to new prohibitions.
"It is also unclear why the Administration believes that prohibiting know-how solely linked to investments would be more effective than comprehensively using export controls or sanctions," wrote McHenry, a North Carolina Republican.
In Asia, South Korea maintains an outbound investment review process, as does Taiwan, which also has special regulations for investments in mainland China. But such a screening regime would be the first of its kind in the U.S.
U.S. investors are never going to welcome new limits to their portfolios, Ludvigson says. But with the ongoing economic sparring between the two countries, in many ways they have already been preparing for further obstacles for doing business with China.
The financial community "can probably make its peace with a very limited program that is surgically targeted to address specific national security risks," he said. "The financial community can read the geopolitical tea leaves and will adjust its approach as needed."